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Housing finance and housing financing system in India

Housing finance and Housing

financing System in India


According to Wallace F. Smith “Housing finance is a factor of

production quite distinct from labour, materials and risk-taking.” i The price of
other factors involved in housing construction need to be paid mostly in cash at
time they are used. In housing sector finance serves the following vital
purposes. Finance is needed for:

(a) Purchase and development of house-sites, purchase of building materials

and actual building a house;

(b) Meeting the annual charges consisting of the upkeep and maintenance
expenses including rehabilitation of kutcha houses, taxes, interest and
amortization charges on capital; and

(c) Covering risks involved in long term housing investment.

Importance of housing finance:

From the foregoing definition it is obvious that housing sector is

indissolubly linked with the financial sector. The fact is that housing is a very
expensive commodity which needs heavy capital outlay testifies to the vital
role of finance in housing sector. In fact, housing leans heavily on finance
which makes housing function of finance to considerable extent.

Let us see the extent to which housing is a function of finance. As seen

earlier, land in this country is more valuable than most other commodities and,
there fore, purchase and development of house-sites involve a substantial
amount of finance. Similarly, actual building of a house is quite expensive
because it involves purchase of costly building materials and labour. Further,
the fact that kutcha, dilapidated and impoverished dwellings constitute as much

Housing finance and housing financing system in India

as 77 per cent of talking the problems of reconstruction or repair and

maintenance. Since these kutcha houses are made of local materials, they are to
be demolished and reconstructed in two-to-three year’s time. This also involves
huge capital investment.

On the top that, taxes, amortization charges, charges to cover risk

involved in long-term investment, etc. call for an additional substantial amount.
Thus to find finance is perhaps the most tough assignment for all those who are
concerned with housing sector.


Problems of housing finance are many and highly complicated. Hence,

they merit discussion here.

1. Housing Finance has a long term character

Housing requires special kind of finance mostly and preferably long

term finance for more than one reason. The product involved is not readily
saleable and does not yield monetary return as in agriculture or industry. In
addition, personal savings or contribution can cover only a very small fraction
of the total cost of housing and the balance has to be necessarily covered by
long-term credit.

2. mortgage-orientation

Mortgage finance is the life-blood of housing finance. Housing is the

most costly commodity and hence it needs a huge capital investment in the
initial stage itself. This initial capital expenditure will be much more than the
life time earnings of most of the families. So, most of the house builders either
for use of income, have to resort to debt. That is why Charles Abrams has
observed that “a mortgage system is accepted as essential almost everywhere” ii,
and such being the case, one can conclude that, Polonius’ advice “Neither a

Housing finance and housing financing system in India

borrower, nor a lender be”, would, if followed, make it impossible for most
people to own their homes.iii

3. Imbalance between its supply and Need

The problem of housing finance emanates from the limitations of means

compared to huge investment needs of housing. Always financial needs of
housing fall short of the provision of finance. This universal phenomenon of
housing finance is the probable reason for the World Bank to maintain a feeling
that “housing is a bottomless pit.iv”

This imbalanced condition of housing finance is prevalent both in

affluent and poor countries, and this is worse when we talk of poor and
underdeveloped countries.

4. Housing Finance is not as Self Liquidating as Agricultural Finance of

Industrial Finance.

This peculiar feature poses a big problem in housing finance. An

investor, either in agriculture or in industry, can look for a further income
stream as the source of repayment. That is to say, agricultural or industrial
investment usually yields quick return. But housing investment is not so. It is
true that house, after the completion, can be rented out which will start yielding
a return, but this will be a very insignificant amount in relation to the huge
investment, and also will come month by month very slowly and leisurely. That
is why the lenders are reluctant to lend to house builders. Therefore, while in
agriculture, or in industry interest forms only a small proportion to total annual
cost, in the case of housing it is the largest recurring cost factor. Hence, housing
finance is much more sensitive to the level of interest rates than agricultural
and industrial finance.

A significant thing that emerges from the foregoing analysis is that

housing needs long-term finance. But the paradox is that in India the so-called
long-term is less than the medium term of most of the developed countries. In

Housing finance and housing financing system in India

India, usual period of long term finance is up to 15 years, though only in

exceptional cases the term is upto 20 years. Under social housing schemes the
loan is extended for 10-30 years. But in several developed countries the period
of long term finance is between 35-75 years. v


Over and above problems, housing finance bristles with several risks.
These risks emanate from the peculiarity of housing commodity. Because of its
uniqueness the housing market is unstable and unorganized. Its prices or rents
are liable to violent fluctuations. Houses are much less negotiable than most
other forms of investment. Housing selling is a time-taking business. It is
difficult to dispose of old house. The gap between the prices or rents of old and
new house property alerts rapidly. As the report of the United nations says,
”when the gap is wide there is danger of capital loss in building or buying new
dwellings; when gap is narrow the older houses are risky purchases.” vi

There is always the risk that a particular house may fall in value owing
to various reasons. With the passage of time the architectural style may become
notorious. A cut in the public transport services or the growth of a slum may
have the same effect.

House is a very poor and unsatisfactory security because of its inherent

peculiarities. In order that the loan may be safe and secure, creditors must place
emphasis on both the nature of the ‘assets’ securing the loan and the credit
worthiness or the repaying capacity of the borrower. Generally, the longer the
term of the loan, the greater the emphasis must be placed on the selection of the
security behind the loan. Housing needs long term finance and hence there
should be greater emphasis on the security. Also, majority of the borrowers for
the housing purpose have little credit worthiness. For him only tangible
security is the house against which, loan may be obtained.

Housing finance and housing financing system in India

(a) Risks in analysis of the security:

Usually analysis of the security begins with an appraisal of the

property. Here the amount of the loan and the value of the property are
compared and when the margin between value and amount of loan is narrow
the creditor tends to soundly appraise property before he advances the loan lest
he should run into risk. The appraisal of real estate is beset with many
complexities and problems. The value of a house for example, fluctuates
violently-either it may appreciate of depreciate depending on the future
developments of its surrounding or locations because it is an immobile thing
another appraisal can be estimation of future benefits, i.e. the rental that it
brings this also depends on various factors which undergo changes often.

Thus the valuation of the house property is quite laborious and full of
uncertainties and so full of risk and hence, lenders hesitate to lend. With the
result, housing finance tends to develop at a very low pace.

(b)Risks in affirmation of borrower’s legal position:

Another phase of analysis of the security behind housing loan is the

determination of the legal position of the debtor (borrower). In certain cases the
creditor in case of default, finds it difficult to establish the debtor ability to
provide the security. This difficulty is further added because housing is
immobile and each place is unique. Possession does not indicate ownership.
Ownership of house or houses with the compound is transferred not by change
of possession but by the passing of legal documents called a ‘deed’.

(c) Risks in tracing evidence of title of ownership:

Before lending against the security of house, the lender must make
certain that full ownership of the house is actually on the name of the borrower,
and he also must make sure that no other claims to the property are
outstanding. In India, because of the prevalence of inheritance and other laws it

Housing finance and housing financing system in India

is not easy to trace out these information correctly and if at all successful in
that because of the Punjab land Alienation Act and similar laws it is not easy to
take possession of the mortgaged house property by resorting to court. Further,
the complexities of mortgage loan-laws may give rise to substantial expenses
on the part of the lender, if the borrower defaults on his loan.

Since housing finance is involved deeply in these risks, housing does not
have the normal facilities of finance available to either agriculture or industry.
In view of these risks and problems of housing finance, one can rightly
conclude that financing of housing programmes presents a knotty problems for
the lower income groups and these problems are of universal nature, prevalent
both in advanced and developing countries. It is commonsense to consider
these risks and problems all the more present in this underdeveloped country
where there is widespread poverty and backwardness and little experience in
the field of housing.


Housing finance can be classified in these categories:

(1) Period wise classification: the most important classification according to

the period or duration of credit may falls in to these categories viz.

(i) Short-term loan (6 to 18 month)

(ii) Medium-term loan (2-5 years)

(iii) Long-term loan (5-25 years)

(2) Purpose wise classification-:

(i) Credit for construction/extension

(ii) Credit for plot purchase

(iii) Credit for maintenance of House

(iv) Credit for Housing expenditure/renovation

Housing finance and housing financing system in India

(v) Credit for purchasing flat/individual house

(3) Security wise classification

(a) Secured:

(i) Secured against mortgage of land

(ii) Secured against some tangible property of debtor as- bond,

insurance policies etc.

(b) Unsecured: The unsecured loans are generally offered on the

personal security of the borrower. It is advance on the promissory or
personal notes of the borrower with or without another’s guarantee.

(4) Credit wise classification-

(i) Institutional credit

(ii) Non institutional credit


In the first 25 years of post independence, India has concentrated on

agricultural development only after the industrial revolution and the continuous
shifting of rural population to the urban areas, the need for development of
housing sector has been emphasized. It is always a dream to own a house
however a majority of the population does not have the required financial
assistance to own a house. Eyeing this as an opportunity, many firms have
opted for extending housing loans not only to boost their bottom lines but also
to reduce the prevailing demand and supply gap. The genuine demand arising
out of the individual need for housing, together with the present boom in the
housing sector it is all set to provide a platform for the housing finance
companies to crave out a piece of fortune. What remained as a very low-profile
sector in India is suddenly witnessing activity that is promising a bright future.
Out of India’s new housing units, 20 percent are financed through the housing
financing institutions. With the gap between the required number of houses and

Housing finance and housing financing system in India

the actual, government identified housing sector as a core and it is only with
the timely in intervention of the government that housing finance has become a
major industry in India. With the establishment of National Housing Bank, the
government has provided the much-needed boost to this sector. At present out
of 380 odd HFIs in India, 42 housing finance companies are registered with the
National Housing Bank out of them 20 are valid for acceptance of public
deposits and remains are not. This number is going to increase in the near
future with the industrial growth. Throughout the second part of the last
decade, this sector has witnessed a growth of over 30 percent and promises to
grow the same rate in the next couple of years. Recognizing the growing need
of housing finance in India, the government has emphasized on housing and
housing finance in the ninth five year plan to know that there is a short fall of
more than 20 mission house units. This is the first time that India has
emphasized on the housing sector.

Even the Asian development Bank has embarked on a two-fold strategy

for India’s housing sector. One is focusing on providing funds to financial
intermediaries who in turn, lend to individual borrowers at the household level.
The second objective is combining slum upgrading and micro credit schemes
for lower income groups in its state level specific integrated urban development
projects. These latest development in the housing sector has made housing
finance one of the growth drivers for the Indian economy in the last decade
what earlier remained as an isolated segment has now transformed itself into a
core sector. Housing finance in India is getting recognition as a specialized
finance product, thanks to the efforts of housing finance companies and the
subsidiary outfits of banks, specializing in this area.

To regularize the housing finance sector in India, the government has set
up HUDCO in 0970vii. It was soon followed by setting up of the Housing
Development Finance Corporation (HDFC) in 1978 in the private housing
finance sector with the support of ICICI, the International Finance Corporation

Housing finance and housing financing system in India

and the Aga Khan Fund. The major objective behind setting up of HDFC and
HUDCO has been to enhance the residential housing stock by providing an
avenue for housing on a systematic and professional basis. Another inherent
objective was to increase the flow of resources to this sector by integrating the
domestic housing sector with the capital markets. Till 1988, HDFC was the
only formal housing finance company operating in India and it is after 1988,
the Banks and insurance companies forayed into this sector. With the entry of
insurance giants like Life Insurance Corporation of India (LIC) in 1989 and the
General Insurance Corporation (GIC) in 1990. The sector witnessed a three-
fold increase in activity. Almost a similar point of time, public sector banks
also forayed into this sector Canara Bank’s Can fin home, State Bank Of
India’s SBI Home Finance. No doubt, the market has immense untapped
potential as well as growth. In the last five years, the housing finance market in
India has been witnessing a growth of over 30 percent and it is expected that
this will continue in the next couple of years. According to an independent
survey, about 60 percent of the Indian households approach informal sources of
finances to borrow funds. It is estimated that if the present rate of growth of
population continues, then by 2010 India would require of an average 2.5
million to 3 million additional houses annually. At present only 20 percent of
the new houses are constructed by the finance of formal housing finance
companies. If, atleast 50 percent of this informal market turns into formal
market then it means a huge fortune for the housing finance institutions.

Housing finance industry did not has much formal introduction because
traditionally, as far as the builders are concerned, financing of construction is
largely done through advances from customers which in turn will affect the
demand for housing. In early eighties salaried individuals who wanted to buy
flats did not have many institutions to approach for finance. Raising finance for
acquiring a house was a painful process, as the house hunt itself. Only a few
institutions in the market were there to help individuals to acquire finance, and

Housing finance and housing financing system in India

that too at exorbitant rated of interest. The few housing finance institutions in
the market were HDFC and a few back, and small number of non-banking
companies. Moreover their reach was largely restricted to the major cities and
they were known to a select few. The rates of interest ranged between12%
to18% and it was basically a seller’s market but now if we see the present
situation of the housing market, there is sea change in the recent years
specially, last two decades. The development of Housing Finance System in
India in the form of institutionalised and formal housing finance super structure
is relatively of a recent origin.

In present picture, Housing Finance System in the country represents a

few players like Government and its Housing agencies, General financial
Institutions, Insurance Sector, Banks and specialized Housing finance
Companies, Private sector extending housing finance and staff quarter facilities
to their employers. In addition there is a large informal sector, which meets
over two-third of the housing finance in the country. This segment represents
mainly self-help resources for housing financing (Consisting of money-lenders,
extended family members, relatives, friends, employers, business associates,
the person’s own accumulated savings and resources obtained through sale of
property etc.) The specialized HFI’s play very marginal role in terms of
deposit mobilization at present on account of various discriminations faced by
them vis-à-vis the competing institutions in the form of TDS, etc. and also due
to their limited geographical spread. In addition to the Specialised Housing
Finance Institution, the cooperative housing finance societies which act as
conduits for the allocated credit are significant in the Housing Finance System
of the country.

Housing finance and housing financing system in India

Development of Housing Finance Market in India

Up to late 1990’s 1998-2003 2003 onwards


Specialized Aggressive entry Oligopolistic

Lenders Housing of Banks HFCs market structure
Finance Companies loose market
(HFCs) share Top 3 key players
have over 80% of
Bank/Insurance Co Irrational incremental
sponsored HFCs competition
More rational
Builders promoted Rapid market
HFCs disbursement
Company promoted Credit quality mortgage growth
HFCs issue at 25%

Housing finance and housing financing system in India



Development Financial
Financial Institutions
Housing Finance
Non-Banking Finance
Other NBFCs

Private Sector Banks

Scheduled Commercial
Banks B
Public Sector Banks

Banks Scheduled Urban Co-

operative Banks

Co-operative Banks
District co-operative Bank
Scheduled State Co-
operative Banks

Agricultural and Rural Primary Land Development

Development Banks I
Other Institutions

Apex Co-operative Housing Societies C

Housing Societies

Housing finance and housing financing system in India

Classification of Housing Finance Industry

Organised Sector Unorganised Sector

Small private financers,
Household saving, Loan from
relatives and friends

On the basis of On the basis of On the basis of

Information Registration Operation

Private Public Registered Unregistered Specialised Housing Non-specialised

with NHB with NHB Institutions Housing Institutions

HDFC HUDCO HDFC Commercial HDFC Commercial

GLOBAL GIC GICHF GICHF Cooperative housing
Finance Societies

Housing in the Five Year Plans:

In the first plan (1951-56), housing was introduced into the policy
framework at the national level. Affordability was emphasised as the key issue
and government support through subsidies and loans were deemed necessary. A
separate Ministry of Works and Housing was established and the National
Buildings Organisation was created. This plan in fact became the benchmark
for subsequent Five Year Plans for the next two decades.

The second plan (1956-61) strengthened the schemes of the first plan
by expanding coverage. However, there was a policy shift as the central
government decided to provide assistance to state governments to develop low-
income housing instead of directly providing loans to low-income groups. This
gave rise to State Housing Boards that still remain in existence today.

The third plan (1961-66) and an annual plan (1966-69) placed

emphasis on planned development and land acquisition, particularly for urban
areas. Although both plans continued the schemes of the previous plans, there

Housing finance and housing financing system in India

was an additional thrust towards targeting low-income groups. State Housing

Boards had their resources increased and were expected to address the housing
shortfall in their respective states.

In the fourth plan (1969-74) government decided to encourage private

and co-operative housing schemes by providing financial assistance. However,
the majority of activity still remained within the public sector. The government
also recognised the need to provide housing finance to low-income groups and
thus set up the Housing and Urban Development Corporation (HUDCO) in
1970. HUDCO’s mandate was to provide such groups with loans below peak
interest rates and with longer repayment periods. At the same time, HUDCO
also sought to finance urban development activities to help decongest cities.
HUDCO actively bought bonds floated by various State Housing Boards and
sought to provide other forms of financial assistance to them as well, thus
functioning mainly as a wholesale lending arm for housing finance.

It was during the fifth plan (1974-79) that the Urban Land (Ceiling and
Regulation) Act (ULCRA) was introduced. ULCRA sought to prevent
concentration of land holding in urban areas and make more land available for
equitable disbursal. However, it failed to achieve its goals and its repercussions
are still being felt today. Significantly, as a completely private sector initiative,
in 1977, the first retail housing finance company, Housing Development
Finance Corporation (HDFC) was set up. HDFC sought to provide financial
assistance to individuals, groups, co-operative societies and companies for staff

Due to increasing urbanisation, the thrust of the sixth plan (1980-85)

was aimed at increasing housing in small and medium towns. Efforts were
made towards improving the conditions of the slums and the lives of its
inhabitants, while emphasising the need to increase support to private groups.
During this period, other housing finance companies also entered in the market.

Housing finance and housing financing system in India

It was the seventh plan (1985-90), however, that brought about a radical
change in government policies. As Garg puts it, the plan “emphasised the need
for radical reorientation of all policies relating to housing and argued that the
major responsibility of house construction would have to be left to the private
sector, and in particular, the household sector. Further, the government should
be involved in housing not so much to build but to promote housing activity”
(Garg, 1998). It was also during this time that several reforms were made. The
UN Global Shelter Strategy, of which India subscribed to, was passed in the
UN General Assembly in 1988. This gave the impetus to the drafting of a
National Housing Policy for the first time. Another major reform that took
place at the time was the founding of the National Housing Bank (NHB) in
1988. The NHB was founded to promote and regulate housing finance
companies and to mobilise additional resources for housing. A Building
Materials and Technology Promotion Council was also formed. During this
period, several housing finance companies were promoted. Commercial banks
still shied away from direct lending to housing finance.

The eighth plan (1992-97) built on the foundations of the seventh plan,
again acknowledging that housing related activities belonged in the private
sphere, although admitting that there was room for state intervention to provide
housing to low-income groups. It was during the eighth plan that the National
Housing Policy was first adopted by Parliament in 1994. Importantly, the plan
recognised that urbanisation was inevitable and concentrated resources on
upgrading urban centers. It recommended that reforms should be made on both,
the financial and legal aspects to allow the mortgage market to develop further.
It laid special emphasis on government incentives to enhance the flow of credit
to the housing sector through housing finance institutions.

Both the ninth (1997-2002) and tenth (2002-2007) plan recommended

further reforms to enable the government to play its role as a facilitator and
encourage the development of the mortgage market. Emphasis was particularly

Housing finance and housing financing system in India

laid on market friendly reforms for improving both taxes and infrastructure to
help increase investments into housing. Both plans stress on abolishing old
laws. In 1999, the central government repealed ULCRA. The government also
adopted a revised National Housing Policy in 1998 and prepared another draft
in 2005. The ninth and tenth five-year plans are also characterised by the
aggressive entry of commercial banks into housing finance.

Government initiatives to develop housing sector in India:

o 1970: HUDCO was established in 1970, as a fully owned Government

of India enterprise with a view to ameliorate the housing conditions in
the urban and rural areas of the country, and assist various agencies
dealing with housing and urban development in a positive manner.

o 1978: The Finance Minister announced the very graciously to launch

HDFC at the inaugural function held in Bombay on Dassera Day, oct.22,
1977. Formally it was launched and started operation on July 18, 1978.

o 1987: India’s insurance act was emended to allow LIC and GIC to
directly issue mortgage loans.

o 1988: NHB was created to implement Government’s new vision of the

housing finance system. It is an apex housing development institution
created to regulate, Monitor and foster housing finance market. NBH
gets its funds from long-term loans form RBI, LIC, GIC, USAID, bonds
equities and profits from mobilizing household deposits.

o 1989: RBI began to allow commercial banks to make large loans for
housing without an interest rate on loan quantity cap.

o 1990: RBI asked these banks to devote 1.5% of their incremental

deposits to direct mortgage lending for housing and/or loans to housing
finance intermediaries.

Housing finance and housing financing system in India

o 2000: Increase in tax deduction on deduction of interest on loans for

self-occupied house from rs 30000 to Rs.7 50000. NHB scheme for
interest rate concession for small borrowers and NHB started ‘Golden
Jubilee rural housing finance scheme’ to target 1.25 lacs units during
1999-2000. Commercial banks instructed by RBI to lend tip to three per
cent of incremental deposits for housing. A proposal had been given to
HFCs to increase flow of credit and HFCs to be taxed on actual basis
instead of accrual basis, liberal tax treatment of income on non-
performing assets. And depreciation rate on new dwelling units
purchased by business sector for employees increased form 20% to

o 2001: To boost up housing in India. The union Government in the 2000-

2001 Financial years budget proposed a 20% rebate of tax under section
88 of the income-tax act, which would now available for repayment of
housing loans upto Rs.20000 per year as against Rs. 10000 earlier.
Earlier, the exemption from tax on long-term capital was not available if
the capital gain from transfer of capital assets was invested in a house, if
one house was already owned. The restriction was removed. Even if the
taxpayers own one house, they can make an investment in anew house
and claim exemption from capital gains tax on sale of capital assets.

o 2002: The initiative had taken in the housing finance area in the last four
years have shown positive results. Total disbursement from housing
finance institutions in 2000-2001 was Rs. 26300 crore, a growth of
about 28 percent in the year. This amount financed the construction of
about 28 lacs houses, much higher than the annual target of 20 lacs
houses. In the current year the growth rate is expected to be around 35
percent. To further strengthen housing finance the measures are being

Housing finance and housing financing system in India

o Consequent to the amendment to the National Housing Bank Act, NHB

has commenced securisation of housing loans and its operationalising
foreclosure of mortgages.

o The NHB will launch a Mortgage Credit Guarantee Scheme, which

would be provided to all housing loans thereby fully protecting lenders
against default. This will make housing credit more affordable thereby
also increasing access to housing credit in rural areas.

o 2004: NHB has issued guidelines for participation in the equity of

HFCs. According to these guidelines, HFCs set up specifically to cater
to the needs of borrowers in rural areas as well as Economically Weaker
Sections (EWS), will obtain equity support from NHB to the extent of
50% of their paid up capital as against 25% for HFCs in urban areas.
NHB has also been providing refinance support to banks and other
housing finance institutions at concessional rates to encourage lending
in rural areas. In 2004-05 and 2005-06, nearly 50% of NHB’s total
refinance was for housing in rural areas under the Golden Jubilee Rural
Housing Finance Scheme (GJRHFS) launched in 1997-98.

o 2005: Under GJRHFS, financial assistance is provided to banks, HFCs

and cooperative institutions in respect of loans extended by them in rural
areas. Refinance under the scheme is provided at concessional rates of
interest of 25 bps less than applicable rates. Prior to 19-12-2005 and for
2004-05, the concession under GJRHFS was 50 bps less than applicable
rates of interest. Targets under the scheme have been gradually increased
from a level of 50000 units in 1997-98 to 3.30 lacs units in 2006-07.


(A) Central Government

Housing has been classified as a basic need in India and successive

governments have highlighted its priority status. Despite such emphasis,

Housing finance and housing financing system in India

housing policies largely remained statements of intent rather than being

translated into implementation. Earlier Indian Governments tended to view
housing from a social perspective rather than an economic one, and the policies
of the time reflected this. Today, the scenario has changed. Players like
commercial banks and housing finance companies have made efforts to
develop the mortgage market and increase the availability and affordability of

The early development of housing finance in India is a result of the

housing policies implemented by the government. A clear perspective on the
evolution of housing policies in India can be seen in the Five Year Plans, which
were based on a centrally planned mode of development. Development
activities in India have been structured on the basis of Five Year Plans since

Housing Investment in Five year Plans:

Table (4.6.1) shows that The total investment proposed in housing has
increased from Rs. 11.5 billion under the first plan to Rs. 7.26 trillion viii (US $
0.15 trillion) in the tenth plan. However, the absolute investment in housing as
a percentage of the total plan investment has declined due to the shift in the
government’s emphasis from provider to facilitator (Garg, 1998).

Housing finance and housing financing system in India

Table 4.6.1
Housing Investment during the Five-Year Plans
(Rs. in Crores)
Total Investment in Economy Total Investment in Housing %o
%of %of
public investment
Plan period housing in housing
Public Private Total Public Private Total to
to public to total
total investment
First plan 1560 1800 250 900
3360 1150 16 50 34.2
(1951-1956) (46.4) (53.6) (21.7) (78.3)
Second plan 3650 3100 300 1000
6750 1300 8.2 32.3 19.3
(1956-61) (54) (46) (23.1) (16.9)
Third plan 6100 4300 425 1125
10400 1550 7 26.2 14.9
(1961-66) (58.6) (41.4) (27.4) (72.6)
Fourth plan 13655 8980 625 2175
22635 2800 4.6 24.2 12.4
(1969-74) (60.3) (39.7) (22.3) (77.7)
Fifth plan 31400 16161 1044 3636
47561 4680 3.3 22.5 9.8
(1974-79) (66) (44) (22.3) (77.7)
Sixth plan 97500 74710 1491 18000
172210 19491 1.5 24.1 11.3
(1980-85) (56.6) (43.4) (7.7) (92.3)
Seventh plan 168148 180000 2458 29000
348148 31458 1.5 16.1 9
(1985-90) (48.3) (51.7) (7.8) (92.2)
Eighth plan 31500 66000
797950 97500 12.2
(1992-1997) (32.3) (67.7)
Ninth plan 52000 99000
(1997-02) (34.4) (65.6)
Tenth plan * 415000 311300
(2003-07) (57.1) (42.9)
Eleventh plan 507318.1@ 373560#
*(2007-2012) (57.6) (42.4)
Figures in brackets indicate the percentage share to respective total

Sources: (1) NHB Trend & Progress Report, 2003

(2) United Nations Human Settlements Programme , Housing Finance Mechanisms In
India, Renu Sud Karnad ,2007
(3) Plan documents, X plan (2002-2-07) and XI plan (2007-12)
(4) Report of the 22nd Standing Committee on Rural Development 2005-06, Ministry of Rural
Development, Government of India, New Delhi, August 2006, p.17.
@ From XI Plan Document on Urban Housing, p.43, investment for Urban Housing is Rs.3,61,318.1
Cr. Rural housing investment is Rs.1,46,000 Cr. as per Source (3), Thus, total is Rs.5,07,318.1 Cr.
# Estimated as 1.2 times as that of the X Plan ie. 1.2 times Rs.3,11,300.00
*Estimated figures as per Plan Documents.

Housing finance and housing financing system in India

(B) Formal Housing Finance System

Table 4.6.2
Housing Finance Disbursement
(Rs. in crore)
Institution Category
2001-02 2002-03 2003-04 2004-05 2005-06(P) 2006-07(P)
Housing Finance
14614.44 17832.01 20862.23 26000 29,500 32,500
8566.41 23553.37 32816.39 50398 60,000 67,000
Commercial Banks
Co-operative Sector
677.58 641.48 623.08 421.1 500 500
23858.43 42026.86 54301.7 76819
Total 90,000 1,00,000
(25.18) (76.15) (29.21) (-41.47)
Figures in brackets are indicate percentage growth over the previous year
Source: NHB Trend & Progress Report, 2005

Table (4.6.2) depicts the picture of housing finance disbursement during

2001-02 to 2006-07. In 2001-02 share of HFC’s was 61% which decreased
over the year and reached upto 32.5% but, share of scheduled commercial
banks increased during the period from 36% to 67%.

Housing industry consists of Formal or Organised and Informal or

unorganized sector. Organised sector is operated by the apex body National
Housing Bank (NHB), a subsidiary of RBI. The beginning of formal housing
finance in India first came with the setting up of HUDCO in 1971. HUDCO
sought mainly to cater to low-income groups, but at the same time provided
technical and financial assistance to State Housing Boards, urban development
institutions and to the co-operative sector.

Private sector involvement in retail housing finance did not begin until
the setting up of Housing Development Finance Corporation Limited (HDFC)
in 1977. HDFC specialised in providing housing finance to individuals, co-
operative societies and the corporate sector. HDFC’s initial share capital
included subscription from His Royal Highness the Aga Khan and International
Finance Corporation, Washington (IFC).

Housing finance and housing financing system in India

Towards the mid and late 1980’s a few housing finance companies were
set up either as private limited companies (e.g. Dewan Housing Finance
Limited) or as a joint venture with partnership from the state government (e.g.
Gujarat Rural Housing Finance Corporation) or bank sponsored housing
finance companies (e.g. Can Fin Homes, SBI Home Finance, PNB Housing
Finance). Even state owned insurance companies like the Life Insurance
Corporation and the General Insurance Corporation of India set up housing
finance arms.

With the recognition of the need to develop a network of specialised

housing finance companies, also came the need for a dedicated apex agency for
promotional and financial functions in the housing finance sector, which was
earlier under the purview of the Reserve Bank of India. As an outcome of the
recommendations of the High Level Group set up by the Government of India
on housing by Dr. C. Rangarajan, then Deputy Governor of the Reserve Bank
of India and the National Commisssion of Urbanisation, the National Housing
Bank (NHB) was established in July 1988 under an act of Parliament viz. the
National Housing Bank Act, 1987. The objective of the National Housing Bank
is to function as a principal agency to promote housing finance institutions and
to provide financial and other support to such institutions. The act empowers
the National Housing Bank to first, issue directions to housing finance
institutions to ensure their growth on sound lines. Secondly, make loans and
advances or render financial assistance to scheduled banks and housing finance
institutions or to any such authority established by or under any central, state or
provincial act and engaged in slum improvement. Thirdly, formulate schemes
for the purpose of mobilisation of resources and extension of credit for

The major financial institutions, which finance housing sector may be

classified in to two broad groups depending upon whether housing finance is
their (i) Primary function (Specialised housing finance institutions like HDFC,

Housing finance and housing financing system in India

LICHFL etc.) or (ii) A secondary function (non-specialised housing finance

institutions like Commercial banks).

(i) Specialised housing finance institutions:

HUDCO (The Housing and Urban Development Corporation)

Specialised housing finance institutions have been set up with the sole
purpose of financing house construction/purchasing activities. HUDCO was
established on 25th April 1970ix, as a wholly owned subsidiary and government
owned enterprise with a view to ameliorate the housing conditions in the urban
and rural areas of the country, build new satellite towns, finance building
material industries, undertake consultancy in the areas of housing and urban
development, conduct research in low-cost and assist various agencies dealing
with housing and urban development in a positive manner. In brief, the
principal mandate of HUDCO is to ameliorate the housing conditions of low-
income group and the Economically Weaker Sections. With the expansion of
HUDCO’s authorized capital form Rs. 2 crores to Rs. 2500 crores in March
2002. Today, HUDCO is financially a strong company with a paid up capital of
Rs. 2001.90 crores and net worth Rs. 3588.55 crores, equity infusion projected
during the 9th period from Ministry of Urban Development and Poverty
Alleviation related to housing and urban development activities, and the
Ministry of Rural Development for rural human settlement activities, HUDCO
has geared to increase its resource mobilization in a substantial manner during
the 10th plan period. Over the years, the equity base has been expanded by the
government. It has further been able to mobilized additional resources from
institutional agencies like LIC, GIC, UTI, banks International assistance,
USAID as well as through public deposits. The cumulative resource base of
HUDCO is Rs. 5056 crores, comprising of equity of Rs. 298 crores, reserves of
Rs. 367 crores and borrowing of Rs. 4400 crores. Overall sanctions and
released since the establishment of HUDCO by the end of 9 th plan amount were
Rs. 42012 crores and Rs. 29334 crores respectively.

Housing finance and housing financing system in India

Despite various limitations imposed on account of its operations,

HUDCO has been able to respond positively to meet the housing needs in
emergency situations of natural calamities such as earthquake, cyclone, floods,
sea-erosion, etc. HUDCO has extended assistance for rehabilitation for the
victims of earthquake in different States. Similarly, for flood affected and the
recent Tsunami affected persons in the coastal regions of the country, assistance
has been extended in collaboration with State Governments and special Central

During the 11th Plan period, HUDCO proposes to extend a larger

quantum of assistance for supporting the housing and urban development
requirements both in urban and rural areas. The proposals envisage a total
sanction of Rs 74,596 crores during the 11th Plan period for both its housing
and urban development programmes. Of the same an amount of Rs 14,919
crores have been tentatively identified for its housing operations. Similarly, of
the total amount of Rs 27,820 crores had been proposed to disbursed during the
11th Plan, an amount of Rs 5,564 crores (releases/disbursements) was
anticipated for its housing programme.

As part of its objective to reach its beneficiaries directly, HUDCO

launched its individual Housing Loan Scheme, i.e. HUDCO NIWAS in March
1999 and offered financial assistance to individual families to enable them to
acquire a home of their own.

HDFC (Housing Development and Finance Corporation Limited)

Housing Development Finance Corporation (HDFC) was started in 1977

as a private sector institution to make long-term housing loans. It acts as a
mortgage bank, i.e. it raises long-term funds from institutional sources and
lends these to home buyers. HDFC follows a variable rate of interest policy, but
unlike HUDCO’s lending terms, HDFC’s policy of variable interest rate is
based borrower. HDFC also receives assistance from USAID and Aga Khan
Foundation for housing finance activities. The HDFC has the most obvious

Housing finance and housing financing system in India

place to go for housing finance. Ever since its incorporation, it has financed
over 1.2 million units. The institution’s share in the organized housing finance
market in India is over 36%. HDFC is pioneered the concept of housing finance
in the private sector and was instrumental in the development of the industry.
ICICI promoted HDFC as development financial institution. It prepared the
initial feasibility study report which helped in securing equity participation
form International Finance Corporation and the Aga Khan Foundation for
economic development and paved the way for the mobilization of equity
participation by LIC, GIC, commercial Banks and large number of industrial
housed in HDFC.

NHB (National Housing Bank)-

The NHB (National Housing Bank) established by and act of parliament

(1987) as an apex housing finance institution, started functioning from July 9,
1988. The bank is wholly owned by the RBI (Reserve Bank of India) the NHB
at present has a capital of Rs. 450 crores, fully paid up the RBI. NHB is
responsible, inter alia, for the development of housing finance system on sound
lines. The NHB is empowered under the provision of the NHB act, 1987 in
public interest by general/ special order to regulate/ prohibit issue of
advertisement to solicit deposits from public by HFC’s it can also specify the
conditions subject to which such advertisement is issued. It can direct HFC’s to
furnish in the prescribed from specified intervals, within the stipulated time,
information/particular in the prescribed statements relating to/ connected with
deposits collected by them. The information, inter alia, may relate to the
amount of deposits, purpose and period of deposits, rates of interest, and other
terms and conditions, in public interest, direction can given to HFCs in general
or in particular regarding matters such as receipt of deposits, rates of interest
and other terms and conditions. In public interest, direction can given as receipt
of deposits and so on. If HFCs do not comply with any such directions, the
NHB can prohibit the acceptance of deposits by them. It is also empowered to

Housing finance and housing financing system in India

direct HFC’s to send a copy of the balance sheet, and profit and loss account/
other annual accounts of depositors holding specified amount of deposits. They
must furnish statement/information/particulars in compliance with directions in
the prescribed time to time. It is the duty of the auditors of HFC’s to enquire
about the compliance with the NHB directions submission of statements/
information/particulars. If they are not satisfied, they must submit a repost to
the NHB giving the aggregate deposits. Such reports should also form part of
their statuary reports under the companies Act. The NHB can conduct and
inspection by its officers/employees or other persons of HFC’s to verify the
correctness and completeness of statements/information/particulars furnished
by them. Such inspection can also be conducted to obtain information, which
the HFC’s have failed to furnish in compliance with the directions. The
direction/member of committees/ other employees/officers/must provide to the
inspecting authority, all statement, and information, within a specified time.

Milestones of NHB

1. Refinance Schemes for housing loans
2. Schemes for Land Development & Shelter Projects
3. Scheme for Equity Participation in Housing Finance Companies
(HFCs)/Building Materials Companies
1. Home Loan Account Scheme
2. Housing Finance Companies (NHB) Directions, 1989
3. Raised Loan of US$25m (first tranche) under USAID Govt.
Housing Guaranty Program
1990-91 1. Notified as a Public Financial Institution
1. Received a Loan Assistance of Yen 2,970 billion from OECF (now
JBIC) 2. Scheme for Financing Housing Infrastructure
1992-93 1. Refinance Schemes for Slum Redevelopment Projects
1. Launched the issue of Unsecured Bonds
1. Guidelines for Prudential Norms for HFCs
1. Golden Jubilee Rural Housing Finance Scheme (GJRHFS)
2. Issued Tax Free Bonds to finance
3. Drawn from ADB US$20m in 1997-98 and US$30m in 1998-99

Housing finance and housing financing system in India

1. Agreement for Cooperation with Canada Mortgage and Housing

1999-2000 Corporation for introducing Mortgage Insurance and New
Products in the Country
1. First Residential Mortgaged Backed Securitization Issue in the
2000-01 2. Guidelines for Entry of HFCs into Insurance Business
1. 3. Refinance Scheme for reconstruction of dwelling units in the
earthquake affected areas in Gujarat
2001-02 1. Credit Enhancement of Bonds floated by HFCs
2002-03 1. Liberalized Refinance Scheme for Housing Loans
1. First time provided Corporate Guarantee for RMBS
2. New Window of lending to Micro Finance Institutions

2005-06 1. Fraud Management Cell set up to disseminate information on

frauds committed on housing loans
1. NHB RESIDEX was launched (first official residential housing
price index).
2. New Products Developed for unserved and underserved segments
of Society
 Reverse Mortgage Loan for Senior Citizens
 Productive Housing in Rural Areas (PHIRA)
2006-07 i.e. Scheme for composite loans (housing and production) to
rural families
 Refinance for Top-up loan for Indira Awas Yojana
 Equity Participation in New Rural Housing Finance
 Occasional Papers & Discussion Papers Series launc
1. Rural Housing Fund was created with Rs.1,000 crores allocation
2. Rural Housing Microfinance was launched
3. NHB-UNESCAP Study on pro-poor housing finance: 7 Asian
2007-08 Countries initiated
4. MOC with UNHABITAT signed for water and sanitation projects
for housing
5. Home Loan Counselling : Diploma programme put in place (IIBF)
Sources: (1) NHB Trend & Progress Report, 2003
(2) NHB Trend & Progress Report, 2005
(3) NHB annual reports

Housing finance and housing financing system in India

The Act empowers NHB to make loans and advances, to scheduled

commercial banks in respect of their lending for housing. There are 380
housing finance companies, but only 42 HFC’s are eligible for refinance. And
only 20 are eligible for acceptance of public deposits.
List of Housing Finance Companies granted Certificate of Registration (COR)
under Section 29A of the National Housing Bank Act, 1987

Sl.No. Name of the HFC Registered Office Address

1 BHW Home Finance Ltd. 202, Okhla Industrial Estate, Phase - III, New Delhi 110 020
No. 29/1, 1st Floor, Sir M.N. Krishna Rao Road, Basavangudi,
2 Can Fin Homes Limited
Bangalore-560 004. KARNATAKA.
Cent Bank Home Finance 9-Arera Hills, Mother Teresa Road, Bhopal 462011. MADHYA
Dewan Housing Finance Warden House (2nd Floor), Sir P.M. Road, Fort, Mumbai -
Corporation Ltd. 400023. MAHARASHTRA.
DHFL Vysya Housing S-401, 4th Floor, Brigade Plaza, Anand Circle, Banglore -
Finance Ltd. 560011, KARNATAKA.
Universal Insurance Building (3rd Floor), Sir PM Road, Fort,
6 GIC Housing Finance Ltd.
Mumbai-400 001. MAHARASHTRA. GUJRAT.
"GRUH", Netaji Marg, Nr. Mithakhali Six Road, Ellisbridge,
7 GRUH Finance Ltd.
Ahmedabad-380 006. GUJARAT.
Housing and Urban
HUDCO Bhawan, India Habitat Centre, Lodhi Road, New
8 Development Corporation
Delhi-110 003. DELHI.
Housing Development
9 Ramon House, H.T. Parekh
Finance Corporation Ltd.
ICICI Home Finance ICICI Bank Towers, Bandra Kurla Complex, Mumbai-400 051.
Kanchenjunga Building, 18-Barakhamba Road, NewDelhi-110
11 IDBI Homefinance Ltd
001. DELHI
12 Ind Bank Housing Ltd 66-Rajaji Salai, Chennai-600 001. TAMILNADU.
Bombay Life Building, 45/47-Veer Nariman Road, Mumbai-
13 LIC Housing Finance Ltd.
Manipal Housing Finance "Manipal House", Manipal-576 119. Udupi District.
Syndicate Ltd. KARNATAKA.
National Trust Housing MOH Building-1st Floor, 576 Anna Salai, Teynampet, Chennai-
Finance Ltd. 600 006. TAMILNADU.
Antriksh Bhawan-9th Floor, 22-Kasturba Gandhi Marg, New
16 PNB Housing Finance Ltd.
Delhi-110 001. DELHI.
"Repco Tower", 33-North Usman Road, T. Nagar, Chennai-600
17 REPCO Home Finance Ltd.
Sundaram Home Finance
18 21-Patullos Road, Chennai-600 002. TAMILNADU.
Vishwakriya Housing Office No.117, 209, Masjid Moth, South Ex Plaza II, South
Finance Ltd. Extn Part II, New Delhi - 49.
26-Gobind Mahal, 86B-Netaji Subash Road, Mumbai-400 002.
20 Weizmann Homes Ltd.

Source: NHB annual report-2008

Housing finance and housing financing system in India

List of Housing Finance Companies granted Certificate of Registration (COR)

under section 29A of the National Housing Bank Act, 1987

Sl.No. Name of the HFC Registered Office Address

401, 402 Aggarwal Millennium Tower, E-1,2,3 Netaji
1 GE Money Housing Finance
Subhash Place, Pitampura, Delhi 110 034. DELHI
Haware's Housing
416, Vardhman Market, Sector 17, Vashi, Navi Mumbai-
2 Development Finance
Corporation Ltd.
111, First Floor, Vardhman Janak Market, Plot CSC A/2-
3 HBN Housing Finance Ltd
B, Janak Puri, New Delhi -110058.
Inara Housing Finance 301-302 Hassanand Complex, Godha Street, Nanpura,
Limited. Surat-395001. GUJARAT.
Indiabulls Housing Finance F-60, 2nd Floor,Malhotra Buiding, Connaught Place,
Jahnavi Home Development U-2/4-Ashirwad Square, Opp. Sosya Circle, Udhna-
and Finance Ltd. Magdalla Road, Surat-395007. GUJARAT.
34/413- Old Post Office Building- Beach P.O.
7 Kerala Housing Finance Ltd.
Thiruvanathapuram-695007. KERALA.
Lokseva Housing Building No.2, Apna Bazar, SFS Compound, Jaina Road,
(Aurangabad) Finance Ltd. Aurangabad-431005. MAHARASHTRA.
Maharishi Housing
A-14-Mohan Cooperative Industrial Estate, Mathura
9 Development Finance
Road, New Delhi-110 044. DELHI.
Corporation Ltd.
Opp. Building No. 163, Near Jain Temple, Naidu Colony,
Manoj Housing Finance
10 Pant Nagar, Ghatkopar (East), Mumbai - 400
Company Ltd.
3 Pushpa Apartments, General Vaidya Chowk, Jalgaon
11 Manraj Housing Finance Ltd.
Orange City Housing Finance Orange City Tower, Near Panchsheel Square, Dhantoli,
Limited. Nagpur-440012. MAHARASHTRA
Orissa Rural Housing and
Ashoka Market Building(3rd Floor), Station Square,
13 Development Corporation
Bhubaneshwar-751 009. ORISSA.
7&8, C.I.T. Road, 2nd Floor, Entally, Kolkata – 700 014.
14 Peerless Abasan Finance Ltd.
Rajiv Gandhi Rural Housing 4th Floor, KHB Complex, Cauvery Bhavan,
Corporation Ltd. Kempegowda Road, Bangalore-560 009.KARNATAKA
Sahara Housingfina Sahara India Sadan, 2 A, Shakespeare Sarani, Kolkata -
Corporation Ltd. 700 071.
Satyaprakash Housing "Parishram" Madan Mahal Chowk, Nagpyur Road,
Finance India Ltd. Jabalpur-482001. MADHYA PRADESH
321-SM Lodha Complex, Near Shastri Circle, Udaipur-
18 SRG Housing Finance Ltd.
313 001. RAJASTHAN.
Swagat Housing Finance A1-207, Laram Centre, Opp. Railway Station, S.V. Road,
Company Ltd. Andheri (W), Mumbai 400058 MAHARASHTRA. .
Transcorp Housing Finance Meghalaya Tower (2nd Floor), Church Road, Jaipur-
Ltd. 302001. RAJASTHAN.
21 Utkal Housing Finance Ltd. Raghunathpur, Jagatsingpur-754 132. ORISSA.
Vastu Housing Finance 759/74, Prabhat Road, Deccan Gymkhana, Pune 411 004.
Corporation Ltd. MAHARASHTRA
Source: NHB annual report-2008

Housing finance and housing financing system in India

The NHB has launched various schemes to mobilize savings of house

holds. This forms a substantial part of its resources. It has formulated a loan
linked savings scheme, namely HOME Loan Scheme (HLS) for the
households, under which banks and HFC’s are authorized to collect deposits for
the purpose of housing finance. It was permitted by the government in 1989to
issue capital gain bonds having a maturity period of three years and carrying an
interest of 9% per annum, payable half yearly, or on a discounted basis in the
beginning itself. This constituted one of the essential sources of financing
housing loans at the lower end carryings subsidized interest rates. The capital
gains bond schemes were discontinued after Sept. 1992. Another sources of
funds for NHB is bonds which are guaranteed by the central Government in
respect of the principal amount and the interest. These bonds qualify as
approved securities for SLR purposes. The NHB also receives financial
assistance form international agencies like USAID and OECF (Overseas
Economic Co-operation Fund), Japan.
Table 4.6.3
Economic Condition of NHB

(Amount in Rs. Million)

Year ended 31 March 2004 2005 2006 2007 2008
Capital 4,500 4,500 4,500 4,500 4,500
Reserves 12,061 12,013 12,877 13,891 15,578
Net Owned Fund 16,568 16,443 17,295 18,292 19,988
Disbursements 32,974 80,894 59,970 56,716 90,364
Loans& Advances 82,840 124,758 162,410 195,719 176,712
Total Assets 131,075 186,966 195,888 212,234 198,979
Gross NPAs 289 277 274 271 Nil
Net NPAs Nil Nil Nil Nil Nil
Profit After Tax 1,181 440 864 1,143 1,697
CRAR (%) 30.1 22.5 22.3 22.6 24.5
Source:Annual reports of NHB

Housing finance and housing financing system in India

LICHFL (LIC Housing Finance Ltd.)-

LIC Housing finance Ltd. Was incorporated in 19 July, 1989 by the LIC
along with ICICI, UTI and IFCI as co-promoters with authorized capital of Rs.
100 crores and paid up Capital of Rs. 75 crores with of no of initial employees
649 and with the 67 operating offices along with 100 extension counters/camp
officers, 6 regional offices and the corporate office at Mumbai. It subsequently
went public in September, 1994 at a premium of Rs. 50 per share. Presently, the
company is the largest housing finance company in terms of markets share next
only to HDFC. Sharp share holding pattern of LIC Housing Finance Limited is
IFCI is 12.71%, UTI 12.17%; GIC 3.03%, LIC 38.43% others 34.30%.x
(ii) Commercial Banks:
Table 4.6.4
Housing Finance by Banks
(Rs. In crore rupees)
Change during the period
Sector 2006-07 2007-08
No. 31-Mar-06 31-Mar-07 31-Mar-08
Amount Percent Amount Percent
1 2 3 4 5 6 7 8
1 Total Bank loan 14,45,531 18,48,166 22,47,437 40,2,635 27.9 3,99,271 21.6

2 Total Grain Loan 40,691 46,927 44,399 6,236 15.3 -2,528 -5.4
Total bank Loan
3 except grain 14,04,840 18,01,239 22,03,038 3,96,399 28.2 4,01,799 22.3
3.1 Housing Loan @ 1,85,203 2,30,994 2,55,653 45,791 24.7 24,659 10.7
Total Loan to
4 5,10,738 6,34,142 7,38,686 1,26,404 24.2 1,04,544 16.5
priority sector
Housing Loan
out of total Loan
4.4 1,33,200 1,60,345 1,82,646 27,145 20.4 22,301 13.9
to Priority sector

@ Direct Housing loan

# Direct and Indirect Housing loan
Source: RBI Annual reports 2007-2008

Table (4.6.4) shows the housing finance disbursed by banks total loans
to housing was 27,145 crores in 2006-07which decreased up to 22,301 crores
during the year 2007-08.

The Reserve Bank of India’s initial efforts to encourage commercial

banks in housing finance came in the form of directed credit. This included

Housing finance and housing financing system in India

mandating banks to lend to housing finance intermediaries at the banks’ prime

lending rate less 150 basis points and annually allocating 1.5 percent of their
incremental deposits in the previous year for housing finance. Overtime, as the
Reserve Bank of India made a bid to move away from directed credit, the
mandated lending below prime rates to housing finance companies was
removed in 1998, though the allocation for housing finance was increased to 3
percent of incremental deposits.

Bank lending under housing comprises three components: direct lending

which entails banks themselves extending housing finance loans, indirect
lending where banks lend to approved housing finance companies or state
housing boards which on-lend for housing finance and lastly, investments in
mortgage-backed securities underlying loans securitised by housing finance

Domestic scheduled banks and foreign banks are required to extend a

minimum of 40 percent and 32 percent respectively of their net bank credit to
the priority sector with sub-targets for lending to various sectors. Priority sector
lending inter alia comprises agriculture, small-scale industries, small
businesses, retail trade, lending to state sponsored organisations for scheduled
castes/tribes and education. It was as late as 1990 when the Reserve Bank of
India put housing finance on its list of priority sectors (World Bank, 2004). For
a direct housing loan to qualify as priority sector, each loan should not exceed
Rs. 1,500,000 (US $33,333) irrespective of whether a house is in a rural, semi-
urban or urban area. As regards indirect housing finance, each loan should not
exceed Rs. 500,000 (US $ 11,111) to qualify for priority sector lending.

It was not till the late 1990’s that banks actively got involved in housing
finance. Against the backdrop of lower interest rates, industrial slow-down,
sluggish credit off-take and ample liquidity, commercial banks recognised that
if they had to maintain their profit margins they needed to shift their focus from
the wholesale segment and build their retail portfolios. The lower interest rate

Housing finance and housing financing system in India

regime, rising disposable incomes, relatively stable property prices and fiscal
incentives made housing finance an attractive business. Further, housing
finance traditionally has been characterised by low non-performing assets and
given the vast demand for housing loans, almost all the major commercial
banks plunged into the business of home loans.

(iii) Cooperative Sector:

The Cooperative Housing Movement is receiving support over

consecutive Five Year Plans and a strong institutional framework is getting
evolved within the Cooperative Movement. In States where Cooperative Acts
and Rules were not enacted, the Acts and Rules of other States were extended
and adopted. With the introduction of these rules and regulations, the
registration of primary cooperative housing societies has been made easy.
Along with this, State level apex cooperative housing federations have also
been formed. These provisions have helped the primary cooperative societies in
securing finance for construction of houses. The number of primary housing
cooperatives, which was 5564 in 1959-60, has increased to 92,000 in 2004-
2005 with a membership of 66 lacs. The number of State level Apex
Cooperative Housing Federations has increased to 25xi .

A two-tier structure is existed in the field of cooperative housing. At

grass toot level thee are primary cooperatives housing societies and at the state
level the apex cooperative housing federations which provide funds to the
primary housing cooperative in their respective jurisdiction.

The primary societies – the primary cooperatives can briefly be classified into
following 4 groups;

1. Tenant ownership housing societies

2. Tenant co-partnership housing societies.

3. House mortgage societies

4. House construction or house building societies.

Housing finance and housing financing system in India

These housing cooperatives have collective ownership of houses

together with common facilities and services. They encourage members to
save, collect capital requirement, assist members in mobilizing necessary
financial and other resources, build houses at reduced costs and promote
healthy community living by creating an improved socio-economic

Apex cooperative housing federations (ACHFs):

The performance of housing cooperatives is highly influenced by

the quantum of funds available to them. The total funds mobilized by various
apex federations upto 31st March, 2005 stood as Rs 8767.67 crores out of this.
3.7% is by way of deposits collected and debentures issued by State Level
Apex Cooperatives, while the rest (96.3%) was mobilized as loans from
different financing agencies as follows:

Table 4.6.5
Share of Different HFI in Housing Finance Market
(i) Life Insurance Corporation of India 38.40%
(ii) National Housing Bank 9,6%
(iii) Commercial and Cooperative Banks 23.40%
(iv) Housing and Urban Development Corporation 18.00%
(v) State Governments 2.80%
(vi) Other Sources 4.10%
Total 96.30%
Source: Report of the 11th five year plan, working group on Urban housing, Govt. of India, Ministry of
Housing and urban poverty alleviation, New Delhi.

Table (4.6.6) shows that during the first three years of 10 th Five Year
Plan i.e. 2002-03, 2003-04 and 2004-05, the Apex Cooperative Housing
Federations could raise an amount of Rs.1774.43 crore from various funding
agencies like LIC, NHB, HUDCO, Commercial and Cooperative Banks and
other sources. The Apex Federations disbursed loans of the order of Rs.1685.71
crore to their primary housing cooperatives as well as individual members for

Housing finance and housing financing system in India

the construction/financing of 1,26,071 housing units during the first three years
of 10th Five Year Plan. The year-wise details are given below:
Table 4.6.6
Details of Loan Disbursement and Number of Housing Units Financed by
Apex Federations during 2002-2003 to 2004-2005

No. of Housing Units

Year Disbursement (Rs in crore)
Constructed /Financed
2002-03 641.48 32481
2003-04 623.08 33165
2004-05 421.15 60425
Total 1685.71 126071
Source: Report of the 11th five year plan, working group on Urban housin , Govt. of India, Ministry of
Housing and urban poverty alleviation, New Delhi.

The housing units generated through Housing Cooperatives mostly cater

to the needs of middle and high income groups in cities and lower income
groups in rural areas. The main constraint faced by Cooperative Housing
Movement was allotment of serviced land for construction of housing units by
the Primary Cooperatives. Except in a few States, where the Cooperative
Housing Movement was active, in others severe constraints are faced in respect
of acquiring serviced land. Cooperatives are not in a position to bid for land at
market prices like private developers and depend mainly on public agencies
and State Governments for allocation of serviced land at
predetermined/controlled prices. This allocation was becoming increasingly
scarce, thus shaking the cooperative movement. A policy intervention may be

Recently, the National Cooperative Housing Federation initiated a

dialogue for organising multi-purpose cooperatives for urban poor and slum
dwellers to improve their living conditions. A concept paper has been circulated
to State Governments and Union Territory Administrations for taking
appropriate steps to set up multi-purpose cooperatives for slum dwellers in the
respective States and UTs.

Housing finance and housing financing system in India

(iv) Private Sector Housing:

Right from the first Five Year Plan, the role of private sector including
efforts by the individual families in fulfilling the housing needs is well
recognized. Of late, lowering of bank rates has resulted in easy access to funds
for housing by individuals and consequently also provided a boost to real estate
development by the private sector. However, most of the housing units
generated by the private sector cater to the upper income households and both
financial institutions and developers chase the MIG/HIG sections. As a result of
these developments, there is a considerable development of higher standard
housing particularly in big cities wherein multinational and corporates are
expanding their business.

It is, however, felt necessary to evolve institutional frameworks and

policy interventions/best practices wherein the private sector is able to
contribute to the housing needs for different cross-sections of the population
including EWS/LIG. Joint sector projects attempted in a few cities as well as
slum redevelopment projects taken up in Mumbai has set a trend and these
need to be replicated widely. Some of the housing projects that deserve a
mention in this context include : (i) Gujarat Ambuja Housing Project jointly
undertaken with West Bengal Housing Board at Kolkata wherein housing is
provided for both EWS/LIG and MIG/HIG, others; (ii) SRA Projects taken up
in the important cities of Mumbai and Pune wherein slum re-housing is taken
up with cross subsidies generated by providing housing for MIG and HIG ; (iii)
Integrated Housing Townships taken up by Karnataka Housing Board as joint
venture projects in collaboration with private companies in the vicinity of
Bangalore and other major towns in the State of Karnataka provides housing
for both EWS/LIG as well as to the higher income groups. Institutions such as
National Real Estate Development Council (NAREDCO) and the
Confederation of Real Estate Developers Association of India (CREDAI) are
playing an important role in regulating the activities of the Private Developers

Housing finance and housing financing system in India

by accrediting them and also by rating such Institutions based on their

experience, capacities and turnovers.

NAREDCO, established in the year 1998 is the apex national self-

regulatory body representing all spheres of enterprises engaged in various
aspects of real estate development. These include land development, layout,
planning, construction of residential, commercial and institutional
buildings/complexes, development of townships, provision of urban
infrastructure (roads, electricity, drainage, sewerage, water supply) and social
infrastructure (recreational, educational and medical facilities). The other allied
fields include architecture, town planning, supply of building materials, estate
finance insurance, estate marketing and brokerage.

CREDAI is an apex organization of promoters and builders with around

3000 members of state and local associations of builders and developers
presently from thirteen states covering more than 80% of real estate
development activities in India It is established with a vision to unite
developers and builders under one banner and provide them a platform where
they can express themselves and share their concerns and thus derive solutions

(C) Informal Housing Finance System

In addition there is a large informal sector, which meets over two-third

of the housing finance in the country. This segment represents mainly self-help
resources for housing financing (Consisting of money-lenders, extended family
members, relatives, friends, employers, business associates, the person’s own
accumulated savings and resources obtained through sale of property etc.) and
rudimentary undeveloped and loose conglomerates formed by similarly placed
persons. Such informal arrangements help individuals (mostly low-income
casual workers in informal sector) to obtain short-term, small amount loans for
various purposes including housing without elaborate requirements of the
formal sector. However there is very little integration of the informal segment

Housing finance and housing financing system in India

with the formal institutionalized system. The financial system designed to

mobilize financial household savings is heavily loaded in favour of the public
financial institutions, which have overriding exclusive position privileges to
access public deposits.


Investment requirements for XI Plan

For estimating the investment requirements for XI Plan, we have made

different assumptions on unit cost of construction of houses in million plus
cities and other urban areas. The details of unit cost of houses for different
categories of housing and the investment requirement are discussed in the
following subsections.

Apportioning of requirement among different income groups:

The construction of semi-pucca houses during the plan period has been
assumed to be in the EWS category. The maximum requirement for new pucca
construction has been assumed to be for the EWS and LIG categories
constituting 81 percent of the new housing requirement, which also include the
additional housing shortage of 1.82 million during the 11th plan period, whereas
MIG and HIG categories would account for the rest 19 percent. The
distribution of the housing requirement adopted for estimating the investment
needs is as in Table (4.7.1).

Housing finance and housing financing system in India

Table 4.7.1
Income wise distribution of Housing Requirement
(in millions)
Sl Total Housing
Category Basis of Assumption
No. Units
1 Pucca Housing 6.00
(a) EWS EWS New -43% of Pucca 2.58
(i) Shelter upgration 12.5% EWS New 0.32
(ii) Sites & Services 12.5% EWS New 0.32
(iii) Skeletal Housing 25% EWS New 0.64
(iv) Plotted Housing 50% EWS New 1.29
(b) LIG LIG New -38% of Pucca 2.28
(c) MIG MIG New -11% of Pucca 0.66
(d) HIG HIG New -8% of Pucca 0.48
2 EWS 0.89
3 Kutcha upgradation EWS 0.38
Source: Report of the 11th five year plan, working group on Urban housin , Govt. of India, Ministry of
Housing and urban poverty alleviation, New Delhi.

(i) Unit cost of houses in urban areas

For calculating the cost of housing units, the costs have been assumed as
per expected market prices in the million plus metropolitan cities at the
beginning of the plan period. The cost of construction in million plus
metropolitan cities has been assumed to be 25 percent more than the cost of the
unit in other urban areas. The unit cost adopted for the million plus metro cities
is tabulated in given table. The market prices of basic building materials have
been on the increase during the post-recession period including the past year
and the current fiscal year. The unit cost of Dwelling Units has been taken as
per the adopted norms by 10th plan document plus increasing building
construction costs index (as per CIDC data) approximately to increase in cost
of Dwelling Units.

Housing finance and housing financing system in India

Table 4.7.2
Unit Cost of House Construction
Unit costs of Construction adopted for Million-plus Metropolitan cities
Basis of Unit Cost in
Assumption Rs./Hsg Unit

1 Housing for Shelter-less 78% of EWS(P) 97,500

2 Shelter Upgradation 35% of EWS(P) 43,750
3 Serviced sites + Cash Loan 57% of EWS(P) 71,250
4 Complete EWS EWS(P) 1,25,000
LIG LIG(P) 2,00,000
MIG MIG(P) 1,207,000
HIG HIG(P) 1,810,500
Cost of upgradation of kutcha to semipucca 35% of EWS(P) 43,750
Cost of upgradation of semipucca to pucca 50% of EWS(P) 62,500
Cost of adding additional room relieving
40% of EWS(P) 50,000
Cost of repairs/renewal or obsolete houses. 75% of EWS(P) 93,750
Source: Report of the 11 five year plan, working group on Urban housing , Govt. of India, Ministry of
Housing and urban poverty alleviation, New Delhi.
Note-The unit cost in million plus metros has been taken as equivalent to Rs.1,25,000 for EWS and
Rs.2,00,000 for LIG.

(ii) Investment Requirement for Urban Housing

Based on the projections and the estimated unit costs, the investment
requirement to cover the shortage at the beginning of the XI Plan is given in
Table. The total requirement of funds for meeting the housing shortage at the
beginning of the XI Plan (i.e. 2007) works out to be Rs. 147195.0 crores.

Housing finance and housing financing system in India

Table 4.7.3
Housing Investment Requirement during XI plan
(Hsg units in millions)
Total Other Urban Areas Million Plus Metro
Grand Total
Hsg (62.2%) (37.8%) of Fund
Category Unit Cost Total Inv. Requirement
Unit Hsg Hsg Cost in Total Inv. (Rs.
in Rs./Hsg (Rs.
Units Units Rs./Hsg (Rs.)
s Unit Million) Millions)
Housing for the
shelterless 7.47 4.65 78,000 362700 97,500 274950 637650
Relieving 4.7
12.67 7.88 40000 315200 50,000 239500 554700
Congestion 9
Upgradation of 0.8
2.18 1.36 35,000 47600 43,750 35875 83475
Kutcha 2
Replacement of
2.39 1.49 75,000 111,750 0.9 93,750 84,375 196125
Obsolete houses
15.3 9.3
Total 24.71 565539 429610 1471950
7 4

Source: Report of the 11th five year plan, working group on Urban housing , Govt. of India, Ministry of
Housing and urban poverty alleviation, New Delhi.

Housing finance and housing financing system in India

The fund required for meeting the additional (New) housing units during
the XI plan period was estimated in table (4.7.4).
Table 4.7.4
Investment Required to cover Housing Requirements at the
beginning of the 11th Plan
(Hsg. Units in millions)
Category Other urban areas (62.2%) Million plus Metro (37.8%)
Total Grand Total
hsg Hsg Total Hsg Unit
EWS Unit Cost investme Fund
sunits units investment units Cost
nt requirement
0.32 0.2 78000 15600 0.12 97,500 11700 27300
Sites &
0.32 0.2 35000 7000 0.12 43750 5250 12250
0.64 0.4 57000 22800 0.24 71250 17100 39900
1.29 0.8 100000 80000 0.49 125000 61250 141250
LIG 2.28 1.42 160000 227200 0.86 200000 172000 399200
MIG 0.66 0.41 965600 395896 0.25 1207000 301750 697646
HIG 0.48 0.3 1448400 434520 0.18 1810500 325890 760410
0.89 0.55 50000 27500 0.34 62500 21250 48750
0.38 0.24 35000 8400 0.14 43750 6125 14525
Total new
7.26 4.52 2.74 2141231
Source: Report of the 11th five year plan, working group on Urban housing , Govt. of India, Ministry of
Housing and urban poverty alleviation, New Delhi.

As can be seen from Table, the investment requirement for new

additional urban housing alone during the XIth Plan period including the pucca,
the upgradation of semi-pucca and kutcha housing units was Rs.214123.1

Housing finance and housing financing system in India

The total fund requirement in the urban housing sector for the XIth Plan
period was estimated to be Rs.361318.1 crores. The summary of investment
requirements for XI Plan period was indicated below:

Investment Requirement
(in Rs. crores)
Housing Shortage at the beginning of XI Plan Period 147195
New additions to the housing stock during the XI Plan
Period including the additional housing shortage during 214123.1
the plan period.
Total Housing Requirement for the XI Plan Period 361318.1
Source: Report of the 11th five year plan, working group on Urban housing , Govt. of India, Ministry of
Housing and urban poverty alleviation, New Delhi.

The estimation of housing shortage has been done by the Technical

Group set up by the Ministry of Housing & Urban Poverty Alleviation, Govt.
of India. The total investment requirement would be in the order of Rs.
361318.1 crores consisting of Rs. 147195.0 crores required for mitigating
housing shortage at the beginning of the 11th plan and Rs. 214123.1 crores for
new additions during the 11th Plan period.



The flow of funds for housing sector during the X plan period and
estimates the expected flow of funds to the urban housing sector from the
formal sector institutions for the XI plan period.

Flow of Funds during Xth Plan:

During the 10th Plan period, the total urban housing requirement was
22.44 million units for which the investment requirement was more than Rs.
4.27 lacs crores. Of this total fund requirement more than 50% was the
expected contribution from the formal sector institutions including banks,
housing finance companies, other financial institutions and budgetary
allocations. From the available data it has observed that the banks, housing

Housing finance and housing financing system in India

finance companies, and cooperative sector institutions had disbursed an amount

of Rs. 1.73 lacs crores during the period 2002-05. Overall contribution of these
three institutions i.e. banks, HFCs and cooperative sector institutions, would be
around Rs. 3.60 lacs crores during the 10th plan period 2002-07 as shown in
Table (4.8.1)

Table 4.8.1
Total Housing Loan Disbursements (Rs. in crore)
2002-03 2003-04 2004-05 2005-06 (P) 2006-07(P)
Commercial Banks 23,553 32,816 50,398 60,000 67,000
HFCs 17,832 20,862 26,000 29,500 32,500
Co-op. Institutions 642 623 421 500 500
Total 42,027 45,301 76,819 90,000 1,00,000

Source: Report of the 11th five year plan, working group on Urban housing , Govt. of India, Ministry of
Housing and urban poverty alleviation, New Delhi.

From the various indicative reports like flow of credit for rural housing
under various ongoing schemes like Golden Jubilee Rural Housing Finance
Scheme, it has observed that approx. 15% of the above mentioned institutional
credit was flowing towards rural housing. Therefore, it is estimated that about
Rs.3.0 lacs crores of institutional credit would be flowing towards urban
housing during the 10th Plan period i.e. 2002-07.

Expected flow of credit during 11th Plan 2007-12:

As per the estimates the urban housing shortage at the beginning of the
11th plan period was 24.71 million units. In addition to this, it is expected that
7.27 million units would be constructed during the plan period. The total funds
required to meet the total construction of the dwelling units during the 11 th Plan
period would be around Rs. 3.61 lacs crores. In view of the current economic
and monetary scenario it is expected that the housing finance disbursals by
banks, HFCs and cooperative sector institutions would grow at a rate of about
15% per annum during the 11th plan period. Taking this into account, it is

Housing finance and housing financing system in India

estimated that the flow of credit disbursal from these institutions would be
about 7.75 lacs crores (gross flow of funds) during 2007-12 as shown in Table
(4.8.2). Assuming the flow of credit to increase to 25% for rural housing during
11th plan period, it is estimated that about Rs. 5.80 lacs crores would be the
credit flow towards urban housing.

It may be pointed out that these projected fund flow figures include
multiple counting and resale of properties, in the sense that cross-funding/ bulk
borrowing is involved among the various institutions. It is therefore, assumed
that the net flow of funds to the housing sector from formal sector institutions
would be 50% of the gross flow of funds, for construction of new houses, given
in the Table (4.8.2). This comes to approximately Rs.2.90 lacs crores, which is
80% of the total investment requirements for urban housing for the 11th Plan.

Table 4.8.2
Expected Total Housing Loan Disbursements (Rs. in crore)
Institutions 2007-08 2008-09 2009-10 2010-11 20011-12
Commercial Banks 77,000 88,000 102,000 117,000 135,000
HFCs 37,500 43,500 49,500 57,500 66,500
Co-op. Institutions 500 500 500 500 500
Gross Flow of Fund Total
Housing 115,000 152,000 175,000 201,000
Gross Fund Flow for
Urban Housing 86,250 99,000 114,000 131,250 150,750
Net Fund Flow for Urban
Housing (50% of Gross
Urban Housing) 43,125 49,500 57,000 65,625 75,375
Net Fund Flow for Urban Housing for the 11th Plan period 2,90,625
Source: Report of the 11th five year plan, working group on Urban housing , Govt. of India, Ministry of
Housing and urban poverty alleviation, New Delhi.

So the total housing finance requirement for 11 thfive year plan would be
361318.1 crore rupees and total fund provided form formal sector would be
290625 crore rupees only so, the total shortage would be Rs. 70693.1 crore.

Housing finance and housing financing system in India

Wallace F. Smith, ‘Housing-The Social and Economic Elements’, University Of
California Press, Barkeley and Los angeles, 1970. P.98
Charles Abrams, ‘Housing in the Modern World-Man’s Struggle for Shelter in an
Urbanizing World’, Faber, London, 1969, p. 106
‘The Function and working of the reserve Bank of India’, July,1970
‘United Nations, Methods and Techniques of Financing Housing in Europe’, 1952
Bedi, H.L., Haridikar, ‘V.K., Housing and Urban Development Corporation’, Practical
Banking Advances, 9th Edition, 1997
Tenth five year plan documents 2002-2007
HUDCO, 38th annual report 2007-08
K. V. Verghese, ‘Housing Problem in India, Economic and social aspects’, Eureka
Publications, New Delhi
“Report of the Task Force on Cooperative Housing, Third Draft”, 2005.